Another cog in the culture industry

January 19, 2005

The Problem is the Amount of Spending on the Elderly

I've expressed great skepticism over President Bush's proposal to privatize part of the Social Security program. There's a genuine problem with the program that needs to be addressed, of course, but it's clear that the White House isn't much interested in solving it in a responsible way.

Medicare is much more of a problem, especially given that medical costs in the U.S. are continuing their rapid rise, and that huge numbers of Baby Boomers will soon be retiring.

The fact that both Bush and his opponents have chosen to debate only Social Security, highlighted by the president's "personal accounts" proposal, betrays a lack of seriousness that promises failure. The nation's problem is not Social Security. It is all federal programs for retirees, of which Social Security is a shrinking part. Admit that and the debate becomes harder, but it also becomes more honest and meaningful.

Our national government is increasingly a transfer mechanism from younger workers (i.e. taxpayers) to older retirees. In fiscal 2004 Social Security ($488 billion), Medicare ($300 billion) and Medicaid ($176 billion) represented 42 percent of federal outlays. Excluding spending that doesn't go to the elderly, the Congressional Budget Office crudely estimates that these programs pay an average of almost $17,800 to each American 65 and over. By 2030 the number of elderly is projected to double; the costs will skyrocket.

We've already seen how the Bush administration has approached the issue of Medicare: an unfunded prescription benefit that will cost hundreds of billions of dollars. Furthermore, we've seen nothing from the Bushies on how to control health care costs. Remember that over forty million Americans have no health insurance, and that the Bush administration is just fine with that. At least Kerry made it a campaign issue.

It makes no sense to separate Social Security from Medicare. Most Social Security retirees receive Medicare. Similarly, it is the total cost of these programs that matters for the budget, taxpayers and the economy. By itself, Social Security is almost irrelevant. Indeed, the big increases in future spending occur in health care. The actuaries of Social Security and Medicare project that Medicare's costs will exceed Social Security's in 2024 -- and then the gap only widens. (The projections don't include Medicaid, which pays for some nursing home care. Including Medicaid would widen the gap further.)

Look at the numbers. From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7 percent of national income (gross domestic product) to 13 percent. Two-thirds of the increase occurs in Medicare. To add perspective: The increases in Social Security and Medicare represent almost a third of today's budget, which is 20 percent of GDP. Covering promised benefits would ultimately require a tax increase of about 30 percent; that assumes today's budget is balanced (dispensing with the issue of Bush's tax cuts). In current dollars, the needed tax increase would be about $700 billion annually.

From time to time, in my darker moments, I think that the elderly are the enemy. Yes, I know, shame on me. My hyperbole aside, though, for years the country has been facing a political issue of intergenerational justice that no one has been willing to tackle.

Samuelson nicely summarizes this issue:

The central budget issue of our time is how much younger taxpayers should be forced to support older retirees -- and both political parties and the public refuse to face it. What's fair to workers and retirees? How much of a tax increase (never mind budget deficits) could the economy stand before growth suffered badly? How much do today's programs provide a safety net for the dependent elderly, and how much do they subsidize the leisure of the fit or well-to-do? (About 15 percent of elderly households have incomes exceeding $75,000.) How long should people work?

We need a new generational compact to reflect new realities. In 1935, when Congress passed Social Security, life expectancy at birth was 62; now it's 77. In 1965, when Congress passed Medicare, the 65-and-over population was 9 percent of the total; by 2030, it's expected to be 20 percent. The generational compact includes Social Security, Medicare and Medicaid. If this year's debate focuses only on Social Security, it will be an exercise in deception. Unfortunately, both the White House and congressional Democrats have a stake in that deception.

It seems that the only way out of our various difficulties is some combination of benefit cuts and tax increases. Since Republicans have spent the past twenty-five years poisoning the politics of taxation and government spending, I think that the Democrats can be forgiven for not advocating positions that Republicans will once again exploit for their partisan advantage.